New 1099 Process

While many business owners have been following the recent debate surrounding healthcare, they probably were not looking for tax law revisions. However, the Patient Protection and Affordable Health Care Act includes just that: an amendment to current tax law that will greatly affect the amount and type of paperwork all businesses will have to keep up with.

Section 9006 of the recently introduced bill states that beginning in January 2012, the purchase of services and tangible goods in excess of $600 will have to be reported via Form 1099. Additionally, payments made to corporations will no longer be exempt from Form 1099 filing. The new law requires that all business-to-business transactions, including business purchases made from office supply stores and rent paid to corporations, must be reported.

Some good news: if you pay for business purchases with a credit or debit card, you will not have to issue a 1099 and therefore will not have to obtain the federal ID number for every vendor with whom you work. However, the new regulations still require learning a new system and will, most likely, greatly increase the amount of time spent on bookkeeping within all businesses. This could be especially difficult for the many small businesses that are already struggling through the current recession.

The intent behind the new regulations was probably at least twofold: 1) current tax law is often confusing, especially when it comes to deciding who should be issued a 1099; and 2) stricter regulations will make it more difficult for businesses to underreport their income and/or include falsified deductions. The new law undoubtedly has several drawbacks, the most significant of which are 1) the increased paperwork burden for all businesses; and 2) the possibility of more errors with so many 1099 forms being issued and processed.

There are a few things that business owners should be aware of. If you forget to issue a Form 1099 to an individual or business to whom you paid $600 or more in a calendar year, you can be assessed a $50 penalty, whereas anyone who deliberately does not issue the form can be assessed $100 or more. Additionally, all business owners will need to acquire the Taxpayer Identification Numbers of all vendors and corporations with whom you work in order to prevent the possibility that backup tax withholding will occur on the payments you make to them. Conversely, you can also be subject to backup withholding if you do not provide your TIN to your customers.

The new tax law amendments will be effective as of January 1, 2012. Comments to the IRS are always encouraged (http://www.irs.gov/), while public hearings on the new law will most likely be held in 2011.